When it comes to investing, there are numerous options available to help build and diversify a portfolio. Three popular investment vehicles are separately managed accounts (SMAs), mutual funds (MFs), and exchange-traded funds (ETFs). Below, we define each type, discuss their similarities and differences, and explain why investors might choose each one.
Separately Managed Accounts (SMAs): An SMA is a personalized investment portfolio managed by a professional investment manager on behalf of an individual investor. The investor owns the individual securities in a separate account, providing greater control over the investments and potential tax advantages.
Mutual Funds (MFs): A mutual fund is an investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. The fund is managed by a professional investment manager, and investors own shares of the fund rather than the underlying securities.
Exchange-Traded Funds (ETFs): An ETF is a type of fund that holds a diversified portfolio of securities, similar to a mutual fund. However, ETFs are traded on stock exchanges like individual stocks, offering intraday liquidity and often lower fees compared to mutual funds.
All three investment vehicles offer professional management and diversification, enabling investors to access a broad range of securities through a single investment. However, while both mutual funds and ETFs pool money from multiple investors to create diversified portfolios, an SMA belongs to an individual and is not pooling money across different investors.
In addition to this, there are several other key differences between the three investment vehicles. For example:
Investors may choose SMAs for several reasons. Firstly, SMAs offer investors the potential ability to customize the chosen investment strategy, which can be tailored to meet specific investment objectives and risk tolerances. For example, some managers will allow their investors to exclude certain securities. Additionally, SMAs offer greater transparency and control as investors have direct ownership of the underlying securities in their portfolios. This may allow investors to take advantage of tax loss harvesting techniques to reduce their capital gains tax liability. SMAs are typically utilized by High-Net-Worth investors, opposed to retail investors, because account minimums are typically higher than mutual funds or ETFs, management fees are negotiable, and are often only accessible through professional investment advisors.
Mutual funds are often preferred by investors for their diversification benefits. By pooling their money with other investors, mutual fund investors gain access to a wide range of securities that would otherwise be difficult to achieve with a smaller investment portfolio. Additionally, mutual funds are managed by professional portfolio managers who have the expertise and experience to select securities that align with the fund's investment objective. This can help to reduce risk and improve returns over the long term. Mutual funds often offer multiple share classes with separate fee schedules based on initial investment minimums.
ETFs have become increasingly popular among investors due to lower costs and greater liquidity. Traditionally, ETFs track a particular index, such as the S&P 500, and offer investors exposure to a diverse range of securities with lower fees than actively managed mutual funds. ETFs can also be traded throughout the day, providing investors with greater flexibility to buy and sell securities. In recent years, actively managed and thematic ETFs have gained prominence. These types of ETFs still benefit from greater liquidity, but fees are often higher than their passive counterparts.
Ultimately, the choice between SMAs, mutual funds, and ETFs will depend on an investor's individual goals, preferences, and individual financial circumstances. It is possible for a given investment strategy to be accessible through multiple investment vehicles. Regardless of the chosen investment vehicle, it is important for investors to thoroughly research and understand the risks and potential rewards associated with each option.
SMAs, mutual funds, and ETFs offer distinct advantages and cater to different investment needs. By understanding the similarities and differences between these investment vehicles, investors can make informed decisions about which options align best with their financial objectives, risk tolerance, and preferences. Working with a qualified professional can help investors navigate these choices and develop a comprehensive investment plan tailored to their unique needs.
Modern x Fiduciary: At Fire Capital Management, we combine the personalized service you deserve with a modern approach to investment management you can feel. Partnering with Fire Capital is tailored, transparent, and flexible. We will develop a custom plan across traditional and alternative asset classes in both the public and private markets to meet your unique needs.
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